S. 3717: Small Business Lending Fairness Act

Beware of Small-Business Lending “Predators”

New York’s Attorney General, Barbara Dale Underwood, has announced the office is investigating potential abuses by finance firms that offer quick money to small businesses.

Allegedly, some merchant cash-advance companies may have engaged in fraud or abused the state court system.

“It’s reprehensible to defraud, deceive and harass small-business owners through predatory debt-collection practices and the abuse of our court system,” said Attorney General Underwood in a recent statement. “If a company is engaging in fraudulent and deceptive conduct, we want to know.”

Business owners across the country routinely see offers from cash-advance companies. In reality, interest rates can exceed 400 percent annually; reportedly more than what crime syndicates charge.

Apparently, cash advances against future business receipts are not loans.

Also, these lenders compel business owners to sign a document known as “confession of judgment,” essentially forfeiting a business owner’s right to defend themselves in court. Armed with a confession of judgement, the lender simply accuses borrowers of not paying and legally seizes their assets, including bank accounts.

Not all states allow the confessions of judgement; however, New York State courts recognize them if filed in New York State courts, no matter where the borrower is located. Since 2012, cash-advance companies have reportedly obtained more than 25,000 judgments in the state of New York alone, worth an estimated $1.5 billion.

Meanwhile, two U.S. senators are seeking to make confessions of judgement illegal. Senators Sherrod Brown (D-OH) has joined with Marco Rubio (R-FL) to introduce a bipartisan bill banning the use of confession of judgements.

“We started getting calls from small businesses that this just hit them from nowhere — it couldn’t be real, it seemed so far-fetched,” said Senator Brown in an interview. “We think it should stop.”

S.3717, the Small Business Lending Fairness Act, would ban their use in commercial transactions. Senator Brown said he would push for the proposal to be passed next year, either on its own or as part of a larger bill.

The Small Business Finance Association is supporting the legislation. While UMA’s Legislative and Regulatory Committee cautiously reviews this new legislation, UMA urges members to be extremely wary of the type of lenders targeted in this bill and to consider having your legal counsel review any documents before signing them.

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